Have you seen the epic meltdown on Chef Gordon Ramsey's show "Kitchen Nightmares" feating Amy's Baking Company? This is quite possibly the greatest public relations failure by a small business that I've ever witnessed. As a wage and hour lawyer, however, I was particularly amazed by the scene where owner Samy Bouzaglo greedily pockets his waitress's tip. Keeping employee tips is a violation of
wage and hour law. It doesn't matter than you pay them $8 an hour. Amy's
Baking Company was foolish enough to do it with the cameras rolling.

"A tip is the sole property of the tipped employee regardless of whether the employer takes atip credit. The FLSA prohibits any arrangement between the employer and the tipped employee whereby anypart of the tip received becomesthe property of the employer. For example, even where a tipped employeereceives at least $7.25 per hour in wages directly from the employer, the employee may not be required to turnover his or her tips to the employer."

We read a story today about a restaurant whose owner was dismayed by his employees' apparent obsession with earning tips, rather than providing good service. Perhaps not recognizing the relationship between those two objectives, he instituted a policy whereby he collects all of the restaurant's tips and redistributes (some or all of) them to various employees, including managers.

California law forbids this. So perhaps it's worth sharing the DIR's FAQs on the laws in California regarding tipping. The Cliff Notes version: the tips belong to the workers, not the owners, and not the managers, but restaurants and other businesses whose workers earn tips can mandate that their tipped employees pool their tips to be shared among tip-eligible workers, as long as management doesn't keep any for itself.

Here's what the Department of Industrial Relations has to say on the matter.

Labor Code Section 351 prohibits employers and their agents from sharing in or keeping any portion of a gratuity left for or given to one or more employees by a patron. Furthermore it is illegal for employers to make wage deductions from gratuities, or from using gratuities as direct or indirect credits against an employee’s wages. The law further states that gratuities are the sole property of the employee or employees to whom they are given. "Gratuity" is defined in the Labor Code as a tip, gratuity, or money that has been paid or given to or left for an employee by a patron of a business over and above the actual amount due for services rendered or for goods, food, drink, articles sold or served to patrons. It also includes any amount paid directly by a patron to a dancer covered by IWC Wage Order 5 or 10.

1.

Q.

What is a tip?

A.

A tip is money a customer leaves for an employee over the amount due for the goods sold or services rendered. Tips belong to the employee, not to the employer.

2.

Q.

When a customer pays their bill with a credit card and the payment includes a tip, when can the employee expect to receive the money from the employer?

A.

Payment of a gratuity made by a patron using a credit card must be paid to the employee not later than the next regular payday following the date the patron authorized the credit card payment. Labor Code Section 351

3.

Q.

My employer is deducting the credit card processing fees from my tips. Is this legal?

A.

No. Labor Code Section 351 provides that the employer must pay the employee the full amount of the tip that is indicated on the credit card. The employer may not make any deduction for credit card processing fees or costs that are charged to the employer by the credit card company from gratuities paid to the employee.

4.

Q.

I work in a large restaurant as a waiter. My employer told me that I am required to share my tips with the busboy and the bartender. Am I obligated to do this?

A.

Yes. According to a California court, Labor Code Section 351 allows involuntary tip pooling. Therefore, your employer can require that you share your tips with other staff that provide service in the restaurant. In this regard, it’s DLSE’s position that when a tip pooling arrangement is in effect, the tips are to be distributed among the employees who provide "direct table service." Such employees could conceivably include waiters and waitresses, busboys, bartenders, host/hostesses and maitre d’s. Employees who do not provide direct table service and who do not share in the tip pool include dishwashers, cooks, and chefs, except in restaurants where the chefs prepare the food at the patron’s table, in which case the chef may participate in the tip pool. Additionally, tip pooling cannot be used to compensate the owner(s), manager(s), or supervisor(s) of the business, even if these individuals should provide direct table service to a patron.

5.

Q.

Are the tips I receive considered part of my "regular rate of pay" for overtime calculations?

A.

No. Since tips are voluntarily left for you by the customer of the business and are not being provided by the employer, they are not considered as part of your regular rate of pay when calculating overtime.

6.

Q.

Is a mandatory service charge considered to be the same as a tip or gratuity?

A.

No, a tip is a voluntary amount left by a patron for an employee. A mandatory service charge is an amount that a patron is required to pay based on a contractual agreement or a specified required service amount listed on the menu of an establishment. An example of a mandatory service charge that is a contractual agreement would be a 10 or 15 percent charge added to the cost of a banquet. Such charges are considered as amounts owed by the patron to the establishment and are not gratuities voluntarily left for the employees. Therefore, when an employer distributes all or part of a service charge to its employees, the distribution may be at the discretion of the employer and the service charge, which would be in the nature of a bonus, would be included in the regular rate of pay when calculating overtime payments.

7.

Q.

My employer deducts my tips from my paycheck. Is this legal?

A.

No. Your employer can neither take your tips (or any part of them), nor deduct money from your wages because of the tips you earn. Furthermore, your employer cannot credit your tips against the money the employer owes you. Labor Code Section 351

8.

Q.

My employer pays me less than the minimum wage because he includes my tips in my hourly pay. Is this legal?

A.

No. Unlike under federal regulations, in California an employer cannot use an employee’s tips as a credit towards its obligation to pay the minimum wage. California law requires that employees receive the minimum wage plus any tips left for them by patrons of the employer’s business. Labor Code Section 351

9.

Q.

What can I do if my employer credits my tips against my wages?

A.

You can either file a wage claim with the Division of Labor Standards Enforcement (the Labor Commissioner’s Office), or you can file a lawsuit in court against your employer in to recover the lost wages. Additionally, if your employer is crediting your tips against your wages, you are being underpaid your wages and thus, if you no longer work for this employer, you can make a claim for the waiting time penalty.

10.

Q.

What is the procedure that is followed after I file a wage claim?

A.

After your claim is completed and filed with a local office of the Division of Labor Standards Enforcement (DLSE), it will be assigned to a Deputy Labor Commissioner who will determine, based upon the circumstances of the claim and information presented, how best to proceed. Initial action taken regarding the claim can be (i) referral to a conference, (ii) referral to a hearing, or (iii) dismissal of the claim.

If the decision is to hold a conference, the parties will be notified by mail of the date, time and place of the conference. The purpose of the conference is to determine the validity of the claim, and to see if the claim can be resolved without a hearing. If the claim is not resolved at the conference, the next step usually is to refer the matter to a hearing or dismiss it for lack of evidence.

At the hearing the parties and witnesses testify under oath, and the proceeding is recorded. After the hearing, an Order, Decision, or Award (ODA) of the Labor Commissioner will be served on the parties.

Either party may appeal the ODA to a civil court of competent jurisdiction. The court will set the matter for trial, with each party having the opportunity to present evidence and witnesses. The evidence and testimony presented at the Labor Commissioner’s hearing will not be the basis for the court’s decision. In the case of an appeal by the employer, DLSE may represent an employee who is financially unable to afford counsel in the court proceeding.

What can I do if I prevail at the hearing and the employer doesn’t pay or appeal the Order, Decision, or Award?

A.

When the Order, Decision, or Award (ODA) is in the employee's favor and there is no appeal, and the employer does not pay the ODA, the Division of Labor Standards Enforcement (DLSE) will have the court enter the ODA as a judgment against the employer. This judgment has the same force and effect as any other money judgment entered by the court. Consequently, you may either try to collect the judgment yourself or you can assign it to DLSE.

12.

Q.

What can I do if my employer retaliates against me because I objected to his crediting my tips against my wages?

A.

If your employer discriminates or retaliates against you in any manner whatsoever, for example, he discharges you because you object to his crediting your tips against your wages, or because you file a claim or threaten to file a claim with the Labor Commissioner, you can file a discrimination/retaliation complaint with the Labor Commissioner’s Office. In the alternative, you can file a lawsuit in court against your employer.

The California Supreme
Court has ruled that an employee has no private right of action against an employer for violations of Labor Code § 351, but that plaintiffs could seek remedies such as common law claims for conversion for violations of section 351. Lu v. Hawaiian Gardens Casino Inc. (2010) __ Cal.4th__.

Labor Code § 351 prohibits employers from taking any gratuity patrons leave for their employees, and declares that such gratuity is “the sole property of the employee or employees to whom it was paid, given, or left for.” A number of Courts of Appeal have held that this prohibition, at least in the restaurant context, does not extend to employer-mandated tip pooling, whereby employees must pool and share their tips with other employees.

Here, the casino’s policy required dealers to contribute 15 to 20 percent of their tips to a tip pool to be shared among other designated employees who provided service to casino patrons. The dealer alleged that this policy constituted a conversion of his tips and violated, among other provisions, section 351. In 2002, he brought this case as a class action. The trial court granted the employer's motion for judgment on the pleadings on the causes of action based on sections 351 and 450, holding that neither section contained a private right to sue. The court also granted the Casino’s successive motions for summary adjudication on the remaining causes of action. The employee appealed.

The Court of Appeal agreed that section 351 does not itself contain a private right to sue. Less than two months later, another Court of Appeal expressly disagreed with the holding on section 351 of the appellate court below. (Grodensky v. Artichoke Joe’s Casino (2009) 171 Cal.App.4th 1399, review granted June 24, 2009, S172237.) The Supreme Court granted review to resolve the conflict on this narrow issue.

The Supreme Court resolved the conflict in favor of employers, holding that "there is no clear indication that the Legislature intended to create a private cause of action under the statute." The Supreme Court's decision is consistent with a prior federal case, Matoff v. Brinker Restaurant Corp. (C.D. Cal. 2006) 439 F.Supp.2d 1035, which also held that section 351 contained no private right of action. Nonetheless, to the extent that an employee may be entitled to certain misappropriated gratuities, the court sees

"no apparent reason why other remedies, such as a common law action for conversion, may not be available under appropriate circumstances. (See Moradi-Shalal, supra, 46 Cal.3d at pp. 304-305 [even without private cause of action under statute, “courts retain jurisdiction to impose civil damages or other remedies . . . in appropriate common law actions”]; see also Civ. Code, § 3523 [“For every wrong there is a remedy”].) Likewise, “nothing we hold herein would prevent the Legislature from creating additional civil or administrative remedies, including, of course, creation of a private cause of action for violation of” section 351. (Moradi-Shalal, supra, 46 Cal.3d at p. 305.)"

The court expressed no view on whether tip pooling is permissible under section 351 and did not address the issue of whether section 450 carries with it a private right of action. The court also made no mention of the Private Attorney General Act (PAGA). Presumably, violations of section 351 can still be pursued under the PAGA.

You can download the full opinion in Lu v. Hawaiian Gardens Casino here in Word or PDF.